Loewen v. Galligan

• Decision Date: 27 December 1994
• Docket Number: No. A9005-02822,A9005-02822
• Citation: 130 Or.App. 222,882 P.2d 104
• Parties: , RICO Bus.Disp.Guide 8686 John S. LOEWEN, Leland S. Loewen, Charles Altorfer and Richard A. Dick, Appellants-Cross-Respondents, H. Elvira Loewen, Amy B. Loewen, Trustee of the Amanda Rose Loewen Trust, Alice Loskot, as Successor-in-Interest to Kenneth W. Loskot, Louise Altorfer, Appellants, v. E.B. GALLIGAN, Anthony J. Bosboom, R. Keith Douglas, John H. Geiger, Louis B. Perry, Roland W. Kueber, A.M. Gleason, Pacific Telecom, Inc., a Washington corporation, Ford Aerospace Corporation, a Michigan corporation, American Network, Inc., an Oregon corporation, ITT Corporation, a Delaware corporation, and United States Transmission Systems, Inc., a Delaware corporation, Respondents-Cross-Appellants, and Michael Holmstrom, Ben Agee, C.P. National Corporation, a California corporation, Defendants. ; CA A77913.
• Court: Oregon Court of Appeals

Page 104

882 P.2d 104

130 Or.App. 222, RICO Bus.Disp.Guide 8686

John S. LOEWEN, Leland S. Loewen, Charles Altorfer and Richard A. Dick, Appellants-Cross-Respondents H. Elvira Loewen, Amy B. Loewen, Trustee of the Amanda Rose Loewen Trust, Alice Loskot, as Successor-in-Interest to Kenneth W Loskot, Louise Altorfer, Appellants, v. E.B. GALLIGAN, Anthony J. Bosboom, R. Keith Douglas, John H Geiger, Louis B. Perry, Roland W. Kueber, A.M. Gleason Pacific Telecom, Inc., a Washington corporation, Ford Aerospace Corporation, a Michigan corporation, American Network, Inc., an Oregon corporation, ITT Corporation, a Delaware corporation, and United States Transmission Systems, Inc., a Delaware corporation, Respondents-Cross-Appellants, and Michael Holmstrom, Ben Agee, C.P. National Corporation, a California corporation, Defendants.

No. A9005-02822; CA A77913.

Court of Appeals of Oregon.

Argued and Submitted May 25, 1994.

Decided Sept. 14, 1994.

Review Denied Dec. 27, 1994.

[130 Or.App. 224-E] Frederick T. Smith, Portland, argued the cause, for appellants and appellants--cross-respondents. With him on the briefs, were Christopher H. Kent, Nicholas I. Goyak and O'Connell, Goyak & DiLorenzo.

Stephen L. Griffith, Portland, argued the cause, for respondents--cross-appellants. With him on the briefs, were Joyce Ann Harpole, Stoel Rives Boley Jones & Grey, Mark A. Turner, Ater Wynne Hewitt Dodson & Skerritt, Jill S. Gelineau and Schwabe, Williamson & Wyatt.

Before WARREN, P.J., and EDMONDS and LANDAU, JJ.

WARREN, Presiding Judge.

Plaintiffs appeal from a judgment dismissing claims in their first and second amended complaints that alleged breach of fiduciary duty, negligence and violations of the Oregon Racketeer Influenced and Corrupt Organization Act, ORS 166.715 to ORS 166.735 (ORICO). ORCP 21 A(8). They also appeal from a summary judgment on their third amended complaint, which alleged claims for securities fraud, common law fraud and breach of contract. ¹ ORCP 47 C. Defendants ² cross-appeal the trial court's denial of their motion for expenses pursuant to ORCP 46 C. We affirm on the appeal and on the cross-appeal.

We assume the truth of the facts pleaded in the first and second amended complaints and view the evidence that was before the trial court on summary judgment in the light most favorable to plaintiffs. Madani v. Kendall Ford, Inc., 312 Or. 198, 201, 818 P.2d 930 (1991); Seeborg v. General Motors Corporation, 284 Or. 695, 700, 588 P.2d 1100 (1978).

This case involves a series of corporate transactions in which plaintiffs lost money that they had invested in defendant American Network, Inc. (AmNet), a long distance telecommunications company. In March, 1984, defendant Pacific Telecom, Inc. (PTI) became the controlling shareholder of AmNet, which was a potential competitor. In October, 1984, PTI and plaintiff John Loewen (Loewen), the majority shareholder and chief executive officer of SaveNet, a long distance telecommunications company that competed with AmNet, entered into a share voting agreement that caused AmNet to merge with SaveNet (the AmNet/SaveNet merger). At that time, AmNet stock was trading for about $4 per share. At about the same time, PTI made a proposal to another telecommunications company, C.P. National Corporation (CPN). That proposal provided, in part, that PTI would cause AmNet to purchase certain CPN assets in exchange for AmNet shares valued at current market price. Later, CPN agreed to invest a minimum of $2 million in AmNet in exchange In November, 1984, AmNet sent its shareholders a proxy statement that purported to describe the AmNet/SaveNet merger. The statement disclosed that PTI controlled a majority of voting shares and that it intended to vote for the merger. Next, the statement disclosed that a debt that AmNet owed to PTI would be canceled in exchange for AmNet convertible preferred stock (the PTI/AmNet transaction). The statement also indicated that CPN would receive AmNet convertible preferred stock in exchange for assets and $2 million. ³ AmNet shareholders approved the merger in March, 1985. The PTI/AmNet and the CPN/AmNet transactions did not require shareholder approval.

for an instrument that CPN could convert into shares of AmNet common stock (the CPN/AmNet transaction).

After the merger, the value of AmNet's stock declined. It began reporting substantial quarterly losses. In 1986, AmNet began negotiations with defendant Ford Aerospace Corporation (Ford) to acquire Ford's subsidiary telecommunications company, Starnet. During AmNet's annual shareholders meeting in July, 1986, defendant Galligan, who was the chief executive officer of AmNet, said that the proposed Starnet acquisition would improve AmNet's net worth. In September, 1986, Ford invested $20 million in AmNet in exchange for stock. AmNet acquired the assets and liabilities of Starnet (the Starnet acquisition). AmNet, however, continued to lose money and its share price declined.

Loewen ⁴ became concerned about the way AmNet was being managed. In October, 1986, Loewen wrote to Galligan and accused him of making misleading statements. In December, 1986, an AmNet shareholder filed a lawsuit in federal court against AmNet and several of the defendants in this case, alleging securities law violations and breach of fiduciary duty in the 1984 AmNet/SaveNet merger, the CPN/AmNet transaction and the PTI/AmNet transaction. In June, 1987, other shareholders joined in that lawsuit. See Guenther v. Pacific Telecom, Inc., 123 FRD 333 (D.Or.1988). AmNet's financial condition continued to deteriorate throughout 1987. Late in 1987, AmNet proposed that defendant ITT Corporation (ITT) buy AmNet outright. In December, 1987, other shareholders filed a second lawsuit against AmNet and several defendants in this case, alleging, in part, claims similar to those in Guenther. See Numrich v. Gleason, 700 F.Supp. 512 (D.Or.1988). In February, 1988, ITT agreed to purchase AmNet in a cash-out merger (the ITT merger). Most of AmNet's shareholders received 25 cents per share. ⁵

In May, 1990, plaintiffs brought this action, alleging breach of fiduciary duties, ORICO violations and securities fraud in connection with the ITT merger. Plaintiffs filed an amended complaint in October, 1990, which added allegations about the AmNet/SaveNet merger, the PTI/AmNet and CPN/AmNet transactions and the Starnet acquisition. The trial court dismissed plaintiffs' direct claims for breach of fiduciary duty, negligence and ORICO, concluding that plaintiffs had alleged only derivative injuries. Plaintiffs then filed a second amended complaint, asserting derivative claims based on those theories. The trial court also dismissed those claims, concluding that, because plaintiffs no longer owned AmNet stock, they lacked standing to assert those claims. Plaintiffs filed a third amended complaint, alleging violation of Oregon securities laws, fraud and breach of contract. Defendants moved for summary judgment, and the court granted it. Plaintiffs assign error to the dismissal of their direct and derivative claims and to the grant of summary judgment on their claims in the third amended complaint.

MOTIONS TO DISMISS

Plaintiffs first assign error to the trial court's dismissal of their direct and derivative claims for breach of fiduciary duty, negligence Plaintiffs, relying on Noakes v. Schoenborn, 116 Or.App. 464, 841 P.2d 682 (1992), and Chiles v. Robertson, 94 Or.App. 604, 767 P.2d 903, mod. 96 Or.App. 658, 774 P.2d 500, rev. den. 308 Or. 592, 784 P.2d 1099 (1989), argue that, when minority shareholders have been defrauded, those shareholders have standing to assert direct claims for breach of fiduciary duty and negligence. Defendants contend that, if the only injury alleged by a shareholder is a diminution of share value, the claim is derivative. ⁶ The general rule is that a shareholder may not assert a direct claim against directors or officers who have defrauded or mismanaged a corporation if the only alleged injury is a diminution of stock value. Smith v. Bramwell, 146 Or. 611, 615, 31 P.2d 647 (1934). If, however, a shareholder has a "special" injury, then the shareholder has standing to assert a direct claim. A special injury is established where there is a wrong suffered by the shareholder not suffered by all shareholders generally or where the wrong involves a contractual right of the shareholders, such as the right to vote. 146 Or. at 616-19, 31 P.2d 647; Wilcox v. Stiles, 127 Or.App. 671, 680, 873 P.2d 1102 (1994). See also Jones v. H.F. Ahmanson & Co., 1 Cal.3d 93, 81 Cal.Rptr. 592, 460 P.2d 464 (1969); 12B Fletcher, Cyc. Corp. § 5913 (Perm ed 1993).

and ORICO, which were contained in plaintiffs' first and second amended complaints. Those claims were dismissed with prejudice. In reviewing the granting of a motion to dismiss, we accept all well-pleaded allegations as true and give plaintiffs the benefit of all favorable inferences that may be drawn from the facts alleged. Madani v. Kendall Ford, Inc., supra, 312 Or. at 201, 818 P.2d 930.

Here, plaintiffs alleged that defendants committed numerous breaches of fiduciary duty. Plaintiffs argue that Noakes v. Schoenborn, supra, and Chiles v. Robertson, supra, stand for the proposition that minority shareholders can assert direct claims for breach of fiduciary duty. In Chiles, we recognized that directors and majority shareholders owe a fiduciary duty to minority shareholders. 94 Or.App. at 618, 767 P.2d 903. We did not, however, discuss the circumstances under which a minority shareholder has standing to assert a direct claim for breach of fiduciary duty or whether a breach of fiduciary duty, by itself, gives rise to a direct cause of action. In Noakes, we discussed an exception to the general rule that a claim alleging a wrongful act by corporate directors or majority shareholders that diminished the value of stock must be brought derivatively. We said that minority shareholders in...